Lenovo says $2.1 billion IBM x86 server deal to close on Wednesday

Gerry Shih

3 Min Read

BEIJING (Reuters) - Lenovo Group Ltd (0992.HK) will close its acquisition of International Business Machines Corp’s (IBM) (IBM.N) x86 server division on Oct 1 for $2.1 billion, giving the Chinese tech firm the firepower to win business clients from U.S. rivals.

A woman tries a Lenovo tablet on display during a news conference announcing the company's annual results in Hong Kong May 21, 2014. REUTERS/Bobby Yip

The closing purchase price is lower than the $2.3 billion announced in January because of a change in the valuation of inventory and deferred revenue liability, Lenovo said. Roughly $1.8 billion will be paid in cash and the remainder in stock.

The purchase is Lenovo’s latest since overtaking Hewlett-Packard Co (HP) (HPQ.N) as the world’s top personal computer (PC) maker last year, in its quest to diversify away from a steadily shrinking PC market. Earlier this year, Lenovo also said it would pay $2.9 billion for Google Inc’s (GOOG.O) Motorola smartphone unit.

In an interview, Lenovo Chief Executive Yang Yuanqing said the IBM deal opened a new “growth engine” for his company. He said he expected the x86 unit to bring in $5 billion in its first year and deliver margins higher than the 4 percent of Lenovo’s PC business.

“In the large and medium enterprise space we can now fully leverage IBM technology to compete with brands like HP and Dell,” Yang said by telephone. “We can combine this good technology with Lenovo’s efficient operations.”

IBM’s x86 server business has trailed those of HP and Dell Inc [DI.UL] in market share. But Yang said Lenovo has expertise competing in markets with razor-thin margins, gained during its journey to becoming the world’s largest PC maker.

Lenovo currently sells a line of low-end servers under the ThinkServer brand, but the company pursued IBM’s x86 portfolio because its higher-end machines can perform more complex analytics and database-related functions.

The x86 server team will continue to be led by former IBM executive Adalio Sanchez, who will report to Gerry Smith, president of Lenovo’s enterprise business group, Lenovo said in a statement announcing the deal’s impending closure.

Some observers expected the deal would take longer to close because of uncertainty about how U.S. regulators might respond to a Chinese company buying a server business during a time of cyber-security tensions between the United States and China.

Lenovo previously bought its consumer PC laptop business from IBM in 2005.

In recent years, IBM has been undergoing a strategic shift away from hardware, focusing instead on higher-margin cloud and big data products.